Shifting from Open Banking to Open Finance
For almost a decade, open banking has been an increasing important factor affecting global banking. While some information sharing has always existed within the banking industry, especially related to borrowing and credit scores, it was highly limited. More recently, the concept of open finance has evolved as way of applying the principles of open banking to the wider financial services industry. Like open banking, open finance revolves around the use of APIs (application programming interfaces) to securely transfer financial data from firm to firm within the financial services industry. Because personal financial data is very sensitive, explicit consent must be sought for transfer and sharing of consumer financial information, and governments are required to play a role in creating an appropriate regulatory framework for the process. Since 2021, several countries in Asia, including Singapore, Indonesia and the Philippines, have begun to release such frameworks, and open finance has started to move from concept into reality.
Collaboration is the core of ecosystem building
The volume of new information produced by the ‘big data’ explosion of the past decade has increased the possibilities for collaboration between the tech companies that control this data, and the fintech companies and traditional finance firms that want to access it to improve their view of the customer.
One recent example of this is the partnership in Indonesia between digital lender Bank Jago and Gojek, Southeast Asia’s largest ride-hailing company. Bank Jago has partnered with Gojek’s payment arms to market financial products based on customer profiles derived from Gojek’s lifestyle data, which includes travel, food and other transactions. Partnerships such as this have attracted attention from some of Asia’s most sophisticated investors. Singapore investment fund GIC has also backed Bank Jago.
Speed of regulation: Help or hinderance?
Regulators in countries across the world are beginning to take open finance principles into account when establishing regulatory frameworks to handle the growth of the fintech industry, and the changes that have taken place in financial technology.
The Monetary Authority of Singapore has been seeking to encourage open finance since 2020. The Singaporean regulator is seeking to create one of the most ambitious examples of open finance systems globally. This system will allow consumers to fully aggregate data held about them across multiple financial institutions, from banks to insurers to investment firms, and control how that information is shared with authorised third parties, while ensure that this sensitive information is held securely, and the firms holding it conform to rigorous cybersecurity standards. This ambition is strongly supported by Singaporean residents, with 95% of respondents to one poll claiming open finance was important to them. This support could be down to the expectation, shared by 76% of Singaporeans, that open finance could bring about fairer and more equal financial services.
In the Philippine Central Bank (BSP) Circular No.1122 of 17th June 2021, establishing guidelines for payments transformation over the coming years, open finance principles are on prominent display, as BSP aims to promote, “the leveraging and sharing of customer-permissioned data among banks, other financial institutions, and third-party providers to develop innovative financial solutions, …[including] those that provide real-time payments, promote greater transparency to account holders, and provide marketing and cross-selling opportunities...” In Indonesia, the central bank has rolled out a Payment Systems Blueprint 2025 which, while currently focused on banking and payments, also indicates a desire to use technology to foster competition in the wider financial industry.
A transparent regulatory framework will be essential for the success of open finance. Businesses seeking to innovate in the space need to be able to establish themselves on a firm legal footing to attract investors and customers, maintain public acceptance, and know they can forge new business models with explicit regulatory support, backed by a robust technological and regulatory framework with penalties for misuse or misappropriation.
How can open finance deliver more value and allow competitive differentiation?
Open banking has been embraced by many regulators as an opportunity to open up markets to competition and dilute the influence of the largest banks on the consumer lending market. By combining recognised technology brands with the unlocking of consumer financial data using open banking, regulators hoped to disrupt the banking industry, increase competition and reduce costs for consumer. The scale of the data captured by the largest banks in each country, has meant that countries often have highly consolidated banking markets. Small FinTech's and neo-bank startups, without these advantages in data have found it challenging to break down the barriers to entry. In many countries, the promise of open banking has been at least partially fulfilled. In Singapore, the big three banks have maintained market share, but only by investing heavily in technology to streamline and improve the customer experience. Regulators globally hope to repeat the effect in the wider financial services industry using open finance standards to improve customer experience and reduce costs across investment and wealth management products, insurance, and consumer credit.
The exact impact that open finance will have on the financial services industry is not known at this point. However, given the principles espoused by regulators, it seems likely that they are hoping that transparency will lead to lower fees and more competition. This could occur in several ways. One would be the expansion of the price comparison websites so common in areas such as utilities, mortgages, savings accounts and online retail, to other financial products, allowing consumers to compare wealth management products, investment funds, and insurance. By enabling customers to control their own data and grant access at the click of a button, open finance can make it easier to shop around for complex financial products. Other relevant factors to consider will be how open finance interacts with other recent developments in fintech, including large language models, robo-advisors, digital payments, blockchain and cryptocurrency.
Conclusion
In recent years, the confluence of several technological trends has disrupted the traditional financial industry and opened the door to radical change. By extending the principles of open banking across insurance, investments, and consumer credit, open finance has the potential to radically transform the shape of financial services, democratise access, improve competition and reduce costs for consumers. Regulators globally are racing to understand and shape these changes, while recognising and mitigating the potential risks from cyber-attacks, data breaches, and financial stability. Managing these risks wisely is essential to maintaining public trust in the financial system and ensuring that open finance can fulfil its promise.
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